MGEC81 Midterm Review (notes made from textbook and lecture slides)

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School

University of Toronto Scarborough

Department

Economics for Management Studies

Course

MGEC81H3

Professor

A.Mazaheri

Semester

Winter

Description

Chapter 3 Classical Theories of Economic GrowthDevelopmentClassic postWorld War II literature on economic development has been dominated by four major and sometimes competing strands of thoughtLinear stages of growth modelTheories and patterns of structural changeInternationaldependence revolutionNeoclassical freemarket counterrevolution oSolows ModeloEndogenous Growth 1950s1960s Theorists viewed the process of development as a series of successive linear stages of economic growth through which all countries must passRight quantity and mixture of saving investment and foreign aid were all that was necessary to enable growth oDevelopment synonymous with rapid aggregate economic growth 1970s Linear stages approach was replaced by two competing schools of thoughtoTheories and patterns of structural changeoInternationaldependence revolution1980s1990sNeoclassical approach prevails oEmphasized the beneficial role of free markets open economies and the privatization of inefficient public enterprises oFailure to develop is a result of too much government intervention and regulation of the economy Linear StagesofGrowth Model of Developmenta theory of economic development according to which a country passes through sequential stages in achieving development Rostows Stages of Growthcountries go through each of these stages fairly linearlyNot all conditions were certain to occur at each stage and the stages and transition periods may occur at varying lengths from country to country and even from region to region The government does not play much ofa role in development 1Traditional SocietyoSubsistence of agriculture or huntinggathering oLimited technologyoStatic society with little individual economic mobility2PreConditions to Takeoff into selfsustaining growthoForeign demand for raw materials leads to economic changeoDevelopment of more productive crops largely for exportoIncreasing investment in irrigation transportation etc to expand productionoAdoption of new technologyoChanging in social structure and the start of individual economic mobility 3The Takeoff selfsustaining growthoFew leading manufacturing sectorsthose for exports and domestic consumptionstart the drive to efficiency and higher scale oOther manufacturing secondary sectors expand rapidly oUsually the textileapparel sector are normally the first takeoff industry 4The Drive to Maturity oExpansion of multiple industries and immersion of new ones diversify the industryoManufacturing moves away from capital goods and towards consumer durablesoDramatic expansion of transportation infrastructure oDramatic investment in social infrastructure including schools universities and hospitals5The Age of High Mass ConsumptionoIndustry dominates while primary sector has fadedoIncreasing consumption of highvalue consumer goods such as cars etcoLarge disposable income for most consumers beyond all basic needs In summary Advanced countries have already passed the takeoff stageLess Developed Countries LDCs are mostly in preconditions stageFor LDCs to move beyond precondition stage to the takeoff stage they simply need to follow a certain set of rules Therefore to start their development journey LDCs should accumulate high levels of domesticforeign saving to finance their capital investment oBut this model does not say how This is explained in the HarrodDomar ModelCriticismsIt is derived from historical nature of already developed countriesModel does not have an engine The stages are just classifications based on history of developed countriesAssumes inevitability of free trade policies and hence reallocation of industries to lowerwage countries The East Asian and African countries do not progress in accordance to the modelThe conditions of the takeoff and pre takeoff stages overlap and are not distinguishableGrowth is automatic by the time is reaches maturity HarrodDomar Growth Modela functional economic relationship in which the growth rate of gross domestic product depends directly on the national net savings rate and inversely on the national capitaloutput ratio Also referred to as AK model because it is based on a linear production function YAxK